How Does Crowdfunding Work?

Crowdfunding is the process of getting a large crowd of people to each pay a small amount of money to invest in an idea or product, typically with a tangible incentive and the promise that when the idea comes to fruition, they will get first access to it.

The key is to engage people in your idea, be able to convince them to invest and then get them to share the project because they want others to know about it. Make sure it's easily shareable on social media. Networking? Definitely. An audience — fans, followers, customers — can talk up your crowdfunding campaign. Without a built-in audience, you are unlikely to raise the money to fund your campaign.

There are many ways to set up a crowdfunding project:

Choose a platform — There are a lot to choose from, including Crowdfunder, Kickstarter, GoFundMe and Indiegogo.

Make your idea enticing — Have a short and snappy sales pitch and some great imagery or video content related to your idea to help it stand out.

Offer good rewards for investment — Usually based on how much someone invests. Consider early access to the product or service, discounts, and extra goodies that will show people they will actually get something back for their money. This is known as rewards-based crowdfunding, when a perk or a product is provided, as opposed to equity. Here is a place to really be creative. Come up with fun rewards — you may promise personal calls and emails to funders.

Have an appropriate range of investment levels — Some folks want to invest a small amount, while others will provide a lot more, but expect a commensurate reward.

Some important things to understand when trying to raise money through crowdfunding:

Make sure your product/service works for crowdfunding. Campaigns for gadgets, video games and films have a high level of success. Raising tens of thousands of dollars for a new nonprofit group supporting an arcane issue is not likely to work. Raising lots of money for a personal need rarely works. If you see a high number of failures for ideas similar to yours, take heed.

Set a realistic funding goal. If you are looking to raise more than $10,000, rewards-based crowdfunding will be a long shot, with very few exceptions.

Plan to spend 30 to 60 days working on your crowdfunding campaign before it launches. You need time to contact media sources and bloggers to build rapport for possible public relations opportunities. Without an initial boost of donations hitting a campaign early, the success rate is very low. You'll need to be constantly on the phone and promoting online, looking for supporters, dealing with questions and fulfilling rewards. But know that nearly every successful campaign has about 30 percent of its crowdfunding goal committed through family, friends and a network of close connections before it's launched.

When crowdfunding works, significant amounts of money can be raised. The process can net low-cost publicity and buzz for a product or business. You may build a rabid social media following and an excited and vocal base of customers who want your company to succeed. It helps to have a breakthrough technology or a breakthrough use of an existing technology.

The hope, of course, is that somehow just being on Indiegogo or Kickstarter will mean thousands of moneyed people will find your project because they're browsing the platform and they'll decide to give you money. But crowdfunding is hard work — crowdfunding platforms are not guaranteed sources of funds. They're simply a more efficient way to reach many potential backers than meeting them one at a time.

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